Analysts’ picks

Ambuja Cement

CMP: Rs 116

Target Price: Rs 85

Morgan Stanley has maintained ‘underweight’ on Ambuja Cement (ACL) largely on concerns of a slowdown in revenues and increasing margin pressures.

“We reiterate our underweight rating on Ambuja and expect the company to continue to post disappointing numbers in the coming quarters as pricing would be under pressure and costs will escalate,” said the brokerage in a note to its clients.

The company has reported another quarter of disappointing numbers with revenues growing only by 16.5% year-on-year at Rs 1,700 crore. While the stock has underperformed, it continues to trade significantly above replacement cost.

“We continue to believe that the slowdown in margins over the next couple of quarters will worsen as the Y-o-Y pricing growth remains too small to cover the rising costs, before pricing growth itself turns negative in financial year 2009,” it adds.


Cairn India

CMP: Rs 193

Target Price: Rs 245-247

Merrill Lynch has recommended a ‘buy’ on Cairn India (CIL), post-release of the operational update of CIL’s assets. “The operational update read together with earlier guidance suggests 17-27% upgrade in plateau production rate and a commensurate rise in reserves in its main Rajasthan block. Development cost is also likely to rise and production delayed. CIL’s base case fair value (Rs 232 share earlier), which is now also its price objective (earlier Rs 245 share), is upgraded to Rs 247 a share,” says the brokerage.

It adds that as per the operational update, plateau production from the three main fields at Rajasthan could be 175k bpd. This could mean plateau production of 180-190k bpd, including output from two other fields. This could mean 20-27% upside to plateau production vis-à-vis earlier estimate of 150k bpd.


Cadila Healthcare

CMP: Rs 248

Target Price: Rs 450

Domestic brokerage Angel Broking has initiated a ‘buy’ on pharma major Cadila Healthcare. It says that the company is trading at significant discount to its peers. During the third quarter of 2008, Cadila posted a 22% growth in net sales mainly on the back of a robust 47% growth in formulation exports.

The company’s domestic branded formulation business, on the other hand, posted a 10% growth to Rs 262 crore. “At the CMP of Rs 263 (at the time when report was released), the stock is trading at 10.5 times financial year (FY) 2009 expected and 8.6 times FY2010 expected earnings, which is at a significant discount to its peers.” The report, however, expressed concern on its overdependence on Altana.

Yet says that new client additions in the segment would aid de-risking and reduce the company’s dependence on the same. Along with this, the stock has also corrected significantly to discount the same.

Reliance Comm

CMP: Rs 646

Target Price: Rs 873

Goldman Sachs has maintained its ‘buy‘ rating on Reliance Communication (RCOM) based on the proposed listing of its tower subsidiary which could unlock value. Reliance Infratel, the tower subsidiary of RCOM, has filed a DRHP with Sebi for an IPO.

“We view the potential listing of Reliance Infratel as a positive catalyst for RCOM – one which we have highlighted in our investment thesis for the stock. Our Rs 873 per share target price for RCOM includes a valuation of $ 4.6 billion for the tower company.”

It has, however, listed some key risks that include delay in nationwide rollout of GSM services beyond the second half of financial year 2009, poor external tenancy on towers and lower-than-expected traffic elasticity yields sub-par wireless operating metrics.

Bhushan Steel

CMP: Rs 997

Target Price: Hold

PINC Research has maintained ‘hold’ on largest auto grade steel manufacturers Bhushan Steel (BSL). It expects the company to further strengthen its position upon completion of the envisaged expansion.

“We have slightly downgraded our financial year (FY) 2008 estimates considering the staid performance in nine months of FY 2008. However, post completion of hot strip mill (HSM), we expect BSL to report a marked improvement in margins and profitability as any outside dependence for HR coil would be nullified,” the brokerage says.